LACK OF UPSIDE VOLUME SHOWS LITTLE BUYING ENTHUSIASM -- SOX INDEX PULLS MARKET LOWER -- NASDAQ 100 IS TESTING LAST OCTOBER'S LOW
MARKET ON FED WATCH ... Very little has changed over the last few trading days. The market has been attempting a modest price bounce to work off a short-term oversold condition. Major market averages (with the exception of the Dow) have been unable to regain their 200-day moving averages. The fact that volume has been especially light on the price bounce isn't encouraging either. Low trading volume may be due to the fact that the market is awaiting the Fed decision (and wording) which is due on Thursday afternoon. It may also be due to the market's lacking of bullish enthusiasm. Yesterday's modest price bounce came on the lowest trading for the Nasdaq market since last December. NYSE volume more closely resembled holiday trading. One of the oldest maxims of chart analysis is that a price bounce needs heavier trading activity if it's going to continue. So far, the price and volume action hasn't helped the bullish case. Chart 1 is a daily "candlevolume" chart of the S&P 500 SPDRS (SPY). What distinguishes this chart from the standard "candle" chart is that the "width" of each candle is determined by the day's trading volume. Heavier volume days produce a wider candle. Lighter volume produces a narrower candle. Notice that the candles have been especially narrow over the last trading week. You can see the same pattern of falling volume on the traditional volume bars. Chart 1 also shows the 200-day average acting as a resistance barrier over the SPY (red arrow).
Chart 1
SEMICONDUCTOR INDEX TESTS LOW... A 3% drop in the Semiconductor (SOX) Index has pushed that key technology barometer dangerously close to a new 2006 low. Chip selling is nothing new. The SOX first broke its 50-day average in early March, and its 200-day line in mid-May. The fact that the 50-day line has fallen below the 200-day line is another bearish sign for the group. Chip weakness has taken its toll on the rest of the stock market and the Nasdaq in particular. The SOX/S&P ratio line has been falling all year, which has caused the Nasdaq market to underperform as well. That's especially true of the Nasdaq 100 which is the first major stock index to reach last October's low.
Chart 2
NASDAQ 100 TESTS OCTOBER LOW... The 2006 percentage performance numbers show how the negative effect of a falling SOX Index filters through the rest of the stock market. The SOX has fallen 6.6% so far this year (not counting today). The next two biggest losers are the Nasdaq 100 (-5.4%) and the Nasdaq Composite (-3.2%). By contrast, the S&P is flat for the year. The best performer has been the Dow Industrials (+3%). Since most of the big technology companies are included in the Nasdaq 100 Index, that index bears close watching. Chart 3 shows why that's especially true right now. That's because the Nasdaq 100 Shares (QQQQ) have reached last October's low at 37.28 (the equivalent of 1515 in the NDX). As any chart watcher knows, a test of a previous low represents another moment of truth for the market in question. If the QQQQ is going to make a stand, this is where it should do it. The weekly bars in Chart 4 show another reason why the QQQQ is at an important moment of truth. The QQQQ is also testing a major support line drawn under its 2004-2005 lows. That makes this a moment of the truth for the rest of the market as well. That's because the direction of big tech stocks has a major bearing on the direction of the market as a whole.
Chart 3
Chart 4
